Krugman Frustrated

Richard D. Wolff

Paul Krugman, stuck in the old Keynesian rut amidst its blinders. The recession would be over, he says, if only the government ran more and bigger deficits to provide the needed fiscal boost. If only the Obama people and those crazy Republicans were less afraid of such bold government action, less befuddled by ideology, and less ignorant of economics. Krugman keeps warning that 2010 will replay 1937 and plunge the economy back down.

Even fiscal conservatives, Republicans, and the rich (overlapping groups henceforth referred to as FCRR) prefer that Washington borrow the money rather than tax them for it. In that sense they support Keynesian deficit spending. Then, too, they see the silver lining on the deficit cloud because it is they who will be lending to and thus drawing interest from the government. So when recessions are sharp and threaten depressions, the FCRR grudgingly go along with Keynesian policies (as they did in late 2008 and early 2009). But they want them limited in size and duration. They equate Krugman with Chicken Little.

What are they debating so furiously? FCRR don't like big, long deficits because of the risks they pose. First, FCRR worry that Washington, engorged with borrowed money, will be tempted -- politically pressured -- to hire unemployed workers directly to produce goods and services competing with private outputs. Second, FCRR worry that state-run enterprises might operate unlike private capitalist enterprises -- more democratically with more worker inputs into basic decisions -- leading private sector workers to demand similar conditions. Third, FCRR, as lenders financing government deficits, worry that rising debt service burdens in government budgets will provoke popular demands to stretch out, cut, or default on those burdens. Fourth, FCRR worry that greater government borrowing will "crowd out" private borrowers and/or impose higher interest costs on them. Fifth, FCRR doubt that today's budget deficits will be reduced by future surpluses.

But mostly FCRR don't like Keynesian deficit spending because they think it postpones the basic economic adjustments needed to end recessions and renew economic growth, employment, and income. They argue that deficit spending -- by reducing unemployment -- slows or stops the fall in wages and salaries needed to revive the business profitability that alone will generate rising investment and growth. Likewise, by slowing the contraction of output, deficit spending slows or stops the fall in material input costs needed to revive profitability. In short, FCRR think that deficit spending beyond quick, short injections to offset extreme downturns is an ineffective, self-defeating policy for reviving capitalism in a crisis. It risks stretching out and thereby worsening the cycles of capitalism rather than allowing them to perform "creative destruction" -- eliminating what FCRR view as "inefficient" jobs and businesses.

All the above concerns emerge logically from the mainstream (neoclassical) theory of how capitalism works. Keynesians have a somewhat different theory, but mostly they address a different point. For them, "creative destruction" may provoke a social movement challenging capitalism itself and demanding fundamental social change.

This furious debate replays a classic contest between center-right and center-left groups over how governments should manage capitalism's cycles. Their shared objective has always been to secure capitalism and revive a growth period before the next downturn. Indeed, that is why each side jabs the other by charging "your policy threatens capitalism under the guise of reviving it."

Endless debates between the two sides are spectacles of mass distraction: political theater about "overcoming the economic crisis." As their relative political strengths shift, public policy oscillates between the two sides. Bush did relatively little in 2007 and 2008; his advisers were devotees of permitting "creative destruction." When the downturn deepened, widened, and threatened to spin out of control, many of those same advisers switched into Keynesian interventionists. Obama kept them to do more of the same. Krugman was hopeful. Once "recovery" seemed underway during 2009 and early 2010, the political strength shifted back toward FCRR, Obama's commitment to Keynesianism weakened, and Krugman began to panic.

All the while, below the surface of these debates, the actual economy proceeds through its cycle in typical capitalist fashion. Enduring high unemployment, home foreclosures, and stagnant production have kept downward pressure on wages, benefits, and the non-human costs of private business (falling costs of second-hand equipment, rents, etc.). Eventually, these will fall far enough to project possibilities for profit sufficiently attractive to coax new investments from capitalists. Then the usual upswing may take hold. However, the amount of time, suffering, and criticism of the economy involved in that "eventually" may generate social tensions and movements that need to be contained. This will then require renewing Keynesian interventions. Then FCRR perspectives will resume the status of loyal opposition and wait again for "recovery" to regroup its forces and return to power.

It is not one side or the other that optimally secures the underlying capitalist system against its instabilities. It is rather the public oscillation between them that best performs that task. Similarly, it is neither Republicans nor Democrats that best protect the government's subordination to the capitalist organization of the economy. That task is rather achieved above all by oscillations between them, by making each the only available political antidote for the failings of the other.

Arguments that capitalism is the problem and that an alternative system is the solution are rarely heard. Mass media, the politicians, FCRR, and Paul Krugman are aligned to maintain that silence. Yet, in a strange twist, the alternative of socialism has resurfaced yet again. Tea Party types, specialists in that American tendency to blame economic problems first and foremost on the government, criticize Obama and his policies as "socialist." Because Obama's enemies introduce the term, his many remaining supporters, especially the young, have begun to inquire about this "socialism." It is genuine interest (rather than guilt) by association. In countless venues, we now face friendly questions about socialism and what socialist responses to capitalism's crisis would entail. The US left now has an historic moment of real opportunity.